and Legislative Strategies for Allowing Private Investment in Mexico’s
The Monterey Institute of International Studies
May 1, 2002
Roadmap of this Paper
Historical Context of the Privatization Conflict
Framework of the Electricity Sector in Mexico
Electric Energy Public Sector Law (LSPEE)
Required Legal Reforms for Mexico’s Electric Sector
II: Negotiation Round Analysis
Zedillo’s initiative: February 1999
Reactions and Responses to the Zedillo Initiative
Other Initiatives and Activities of the First Round
during the Fox Presidency
people, interests, options, and objective criteria
SUTERM & SME
Sector & Foreign Investors
III: Legislative and Negotiation
Strategies for President Fox and the PAN
If the legislative strategy does not work
An Interest-Based Negotiating Strategy for President Fox and the PAN
Fox and the PAN
and the PRI
CFE and LFC
Major Political Stakeholders and their Interests
for President Fox and the PAN
A Negotiating Strategy
for Mr. Fox and the PAN
A BATNA For Mr. Fox
and the PAN
Preliminary Cost Benefit Analysis of opening Mexico’s electric sector
to private investment
an uproar of public outrage and political controversy Mexico’s federal
government reduced subsidies to electricity consumers by 25%. The increase
of electricity rates is designed to increase government revenues by US
$ 1 billion in the fiscal year 2002. The federal government claims that
the rate increases will only affect large electricity consumers and will
not affect 75% of the population. However, according to the data published
by Mexico’s Federal Electric Commission (CFE1), electric bills will increase
proportionally more for small consumers.
the midst of a media finger pointing war, the Institutional Revolutionary
Party (PRI) and the Democratic Revolution Party (PRD), two of Mexico’s
largest political parties, condemned the rate increases and President
Fox’s government for targeting Mexico’s weakest economic classes. President
Fox’s National Action Party (PAN) responded that the rate increases are
necessary even if they are unpopular. PAN legislators emphasized that
the important thing is to protect lower income families and to begin the
much needed restructuring of Mexico’s electric sector.
Flores, leader of Mexico’s Electricians Union (SME), says that the rate
increases are a government scheme to give electric workers a bad name
and pave the road for the privatization of the energy sector. According
to Mr. Flores, privatizing the electric sector would hurt lower income
Mexicans and raise their electric bills up to 300%. Flores blames the
federal government for the energy crisis stating that it has failed to
make badly needed investments in the last thirty years.
rate increase got mixed reviews from the private sector. Javier Prieto,
President of the Confederation Chamber of Industrialists says that the
rate increase is a negative signal and says he will not sign the National
Development Pact, an agreement between labor and capital representatives
being promoted by the federal government to help Mexico’s ailing economy.
Meanwhile, Jorge Espina President of Mexico’s Confederation of Mexican
Employers (COPARMEX); says that the rate increases are a positive if they
come coupled with opening the electric sector to competition.
Central Bank (BANXICO), reports that the average electricity rate increase
is 30% and that it could trigger a surge in inflation so it has decided
to tighten the money supply and increase interest rates.
This effort to slow down the economy to prevent inflation comes at a particularly
bad time. The slowing down of the US economy has already resulted in the
loss of over 437,000 jobs in Mexico. Only 32% of the Mexican Active Economic
Population (PEA) is formally employed. At the beginning of 2001, Mexico’s
GDP was expected to grow by 6.9%. Because of the US recession, Analysts
are now estimating that the Mexican economy will have a negative growth
of 0.4% in 2001.
need to improve operations and financial performance while making massive
new investments in the power sector is the result of the accumulated effect
of inadequate rate levels and ineffective investment strategies (which
are now being corrected). Efforts to allocate resources to meet these
needs, however, are handicapped by the pressures faced by the financially
strapped governments to fund basic socio-economic programs and obtain
financing for critical non-power infrastructure projects.
Thus significant private capital investment will be required in Mexico
as in other developing countries.
purpose of this paper is to analyze the negotiations for opening Mexico’s
electric sector to private investment. In part I, this paper will first
review the historical context of privatizations in Mexico and then go
on to analyze the investment needs of the Mexican electric sector and
its legal framework that have prompted the latest privatization conflict.
organization purposes, negotiations have been divided into two rounds.
Part II of this paper will analyze the negotiation rounds. The first round
of negotiations is covered in the first section of part II of the paper.
It began with the Zedillo initiative in 1999 and culminated at the end
second round will be taking place during 2002. In the second section of
part II of this paper, stakeholders, their interests, their options, and
objective criteria, for the second round will be analyzed.
III or the conclusion of the paper will offer a negotiation strategy for
the PAN so that it can reach its objective of opening the electric sector
to private competition.
Context of the Privatization Conflict
is widely accepted that the electricity sector is in dire need of a restructuring
process. The big question is where the money will come from. An estimated
U.S. $59 billion in 2000 prices will be required to build the necessary
infrastructure for electricity generation to meet the country’s growing
demand for electricity. Mexico’s public finances cannot cover these huge
costs. The Mexican government currently collects 21.87% of Mexico’s GDP
However, it only collects about 10% of GDP in taxes.
A third of the government’s revenues are from oil sales. Every US dollar
that the barrel of oil drops in price per annum costs the Mexican government
US $9.2 billion in lost revenues.
February of 1999 the government first addressed this need by submitting
to congress proposed amendments to the Constitution aimed at further opening
it to private investment accompanied by a new electricity law introducing
competition in different segments of the industry. The reforms would involve
the creation of an independent system and market operators, and separate
generation, transmission and distribution companies.
Mexican Congress blocked the reforms to the electricity sector proposed
by Mexico’s former President, Ernesto Zedillo. Mexico’s new President,
Vicente Fox, is trying to get the New Mexican Congress to open the electric
sector to private investment. But this will not be easy since he will
need the support of the Institutional Revolutionary Party (PRI), which
Fox defeated in the 2000 election, to muster enough votes to pass these
reforms to Mexico’s Constitution.
to say, the debate over opening the energy sector to private investment
is a heated one. The energy industry has long been a banner of Mexico’s
sovereignty and independence. President Lazaro Cardenas nationalized the
oil industry in 1938. President Cardenas competes with President Juarez
for the title of most beloved Mexican President. The oil industry at the
time belonged to: American, British, and Dutch oil companies that were
viewed as exploiters of Mexico’s resources and workers. Mexican
ownership of the energy industry has been a source of national pride.
in the past corrupt politicians and Union leaders have reaped the benefits
of running Mexico’s energy industries as if they were their own private
properties. Even today, a few thousand Mexicans that constitute the privileged
bureaucracy of Mexico’s Parastatal energy companies enjoy special benefits
at the expense of the efficiency of these key strategic industries. These
few Mexicans protect their privileges masked under a populist national
pride. A single example of how this issue affects the great bulk of Mexicans
and the country’s economy is Mexico’s sale of crude oil to the US; the
same oil is bought back from US oil refiners as gasoline for a higher
price that Mexican consumers pay at the gas pumps.
government ownership of the Mexican energy industry has now become a hot
electoral issue. Members of the PRI and of the PRD are making President
Fox’s efforts to attract private investment and modernize these industries
a very difficult process.
In fact, President Fox has had to continually vow that he will not privatize
the energy sector. Mr. Fox has repeatedly stated that he wants to allow
private investment and foster competition but without compromising national
security and the patrimony of all Mexicans.
of privatizing is politically unwise in Mexico at this time because previous
privatizations are regarded as massive and expensive failures. TELMEX;
the former parastatal corporation, was privatized by former President
Carlos Salinas in 1991. The CARSO group property of Carlos Slim, the richest
man in Latin America, won the bid for TELMEX in a less than transparent
As part of the deal TELMEX received from the Mexican government a five-year
"grace-period", during which the Mexican telecomm firm would have no competition,
so Mexican investors could amortize their investment costs.
In Mexico’s telecom privatization consumers were the only losers because
of rate increases even though quality of service gains from privatizing
have been substantial.
major privatization gone awry in Mexico is that of the banks. In a populist
gesture President Lopez Portillo nationalized Mexican banks in 1982. Banks
profitability and efficiency began to suffer because they were placed
in the hands of bureaucrats with no private sector banking experience.
the early 1990’s President Salinas privatized hundreds of state enterprises
to raise money to pay international creditors and start badly needed social
projects. Among these enterprises were the nationalized banks. Little
detail was observed on who the buyers were. Bad decisions, lack of experience,
and greed, resulted in excessive bad loans. During President Zedillo’s
term, the recently privatized banks were on the verge of bankruptcy. President
Zedillo was forced to bail out the banks to prevent the collapse of Mexico’s
financial system. Until then, Mexican depositors had no insurance program
to protect depositors like the FDIC does in the U.S. The cost of bailing
out the banks is over U.S. $65 billion plus interest. The bill will have
to be paid by Mexican taxpayers over the next generation while the bailed
out bankers continue to live in the lap of luxury. Large amounts of the
nation’s budget are now unavailable for badly needed social spending because
of this public debt.
The privatization and rescuing of banks and highways may have been a determinant
factor in the PRI"s first time loss of the Presidential race. It is no
surprise then that Mexicans are weary of privatizations.
2. Mexico’s Electric Sector
Federal Electricity Commission (CFE) and Luz y Fuerza Centro (LFC)
are Mexico's two state-owned electricity companies. CFE has enjoyed a
monopoly in the electric power sector for decades, although reforms instituted
in 1992 allow independent power producers (IPPs) and co generators limited
involvement. CFE generates about 92% of Mexican electricity. LFC contributes
about 2%, with most of its customers in Mexico City. Pemex generates 4%,
while the remainder is generated by the private sector.
In 1999 electricity
consumption in Mexico was 1348 KWh per capita, approximately 10% of the
per capita electricity consumption in the U.S. An increase in electricity
consumption is expected as Mexicans improve their productivity and raise
their living standards. Mexico’s economic growth must stay ahead of its
population growth. In 1999 GDP per capita was US $4,900 for its near 100
prices in Mexico are not determined by the market but by the Federal Electricity
Commission (CFE). During the 1990’s Mexico’s inefficiency in the generation,
transmission, and distribution of electricity, resulted in its commercial
and industrial consumers having to pay rates that on average were 48%
higher than their US counterparts for electricity. Mexico’s commercial
and industrial sectors have heavily subsidized electricity rates for residential
and agricultural electricity consumers. While residential consumers in
the US paid 8.24 cents per KWh, Mexican consumers paid 5.67 for KWh or
37% less. The cost per KWh for agricultural consumers in the US was 6.24
cents while their Mexican counterparts paid 5.6 cents.
the year 2000 Mexico subsidized electricity consumers with U.S. $4.2 billion
dollars for CFE customers and U.S. $1.9 billion for Luz y Fuerza del Centro
While residential users paid 39% of their real electricity consumption,
agricultural users paid only 26%. The Mexican government pays for 31%
of the country’s electricity bills.
antiquated electricity policies and equipment have resulted in distortions
and inefficiencies that in the end have resulted in a 24% electricity
price increase in Mexico during the 1990’s while prices in the US increased
only by 4.71%.
The Mexican government has faced major economic crises since the mid
nineteen seventies; this economic turmoil generated a systematic lack
of investment in electric infrastructure.
Due to the growing demand for electricity services and a very tight national
budget these subsidies are unsustainable, electricity prices will continue
to increase and consumers will soon have to pay the bill on their own.
private investment has resulted in guaranteed electricity supply up to
the year 2005.
However, failure to continue making substantial investments in generation
capacity and infrastructure could adversely affect the international competitiveness
of key northern industrial regions.
the (1999-2020) time-period, electricity demand is expected to grow at
the exponential rate of 6.6% per year. Historically the growth of the
electricity sector has been tied to economic growth and is absolutely
necessary for development. From the years 1999 to 2009, electricity sales
are expected to increase by 77% growing from 145 TWh to 257 TWh per annum.
growth rate of electricity generated by self-suppliers and co-generating
parties is expected to grow at a 13.6% per year going from 10.9 TWh in
1999 to 39.1 TWh by 2009.
In order to meet this growing demand Mexico will need to install new infrastructure
capable of generating 26,281 MW. Less than half of the necessary infrastructure
(12054 MW) is already under construction or in the bidding process to
Legal Framework of the Electricity Sector in Mexico
are many obstacles in the road to solving the Mexican energy crisis. It
is ironic that one of the toughest obstacles to surmount is the reforming
of a legal framework that is supposed to be in place to serve the interests
of Mexican citizens. Under the Mexican Constitution, oil production and
much of electricity production are reserved for government monopolies
– Pemex and the Federal Electric Commission (CFE) respectively-. Politicians
and the general public jealously defend the two giants as symbols of Mexican
sovereignty. Because the government forces them to subsidize consumers,
however, the firms are perpetually short of capital to invest in new facilities,
equipment and technology.